Investors should still hold a modest amount of gold - BlackRock's Koesterich

Gold's inability to hold gains above $4,100 an ounce continues to highlight near-term downside risks. However, an expert at the world’s largest asset manager continues to recommend investors maintain some exposure to the precious metal.

In his latest note on gold, Russ Koesterich, Portfolio Manager for BlackRock Global Allocation Strategy, said that although gold has fallen out of favor among investors who are now focused on strong earnings and cash flow, the long-term case for holding the precious metal remains intact.

Koesterich noted that after a strong start to the year, gold prices have fallen about 25% from their all-time high in January and are down about 7% for the year. He explained that gold’s historic rally at the start of the year reshaped its role in investors' portfolios. Because of its strong momentum, gold became less of a safe-haven asset. “Rather than providing downside protection, gold added risk to a portfolio,” he said.

However, he added that the eventual shift in momentum only partly explains the sharp, months-long correction. He pointed out that the primary driver behind gold’s decline has been renewed strength in the U.S. dollar. “Despite increasing chatter of a ‘debasement trade,’ the dollar has rallied sharply since the January lows, with the Dollar Index (DXY) up more than 6%. Concerns over a global energy shock, a resilient U.S. stock market and a dramatic reversal in expected Federal Reserve policy have all led to a stronger dollar,” he said.

He added that another important headwind is the fact that gold “is not an AI stock.” “Even within the stock market, performance has increasingly been driven by an increasingly small set of AI companies experiencing outsized earnings growth. As an asset with no earnings, investors are treating gold the same way they’re treating slow-growth, stable companies, by basically ignoring it,” he said.

Despite these headwinds, Koesterich said the precious metal still plays an important role in diversified portfolios. “The structural reasons to hold gold remain intact. Debt and deficits remain at historic levels, debasement remains a long-term risk and while gold did not work in March, geopolitics have not become any more stable. All of which still argues for maintaining a modest gold position in portfolios,” he said.

Gold is looking to end the week with modest gains as it continues to consolidate near critical support levels. Spot gold last traded at $4,074.70 an ounce, up 1.45% from last Friday’s close.